Tuesday, December 16, 2008

Best Dividends Stocks for the Long Run

In his book, Stocks for the Long Run, Wharton Professor Jeremy Siegel proves that stocks have been the best performing investing for the past 200 years in the US. Equities outperformed other assets classes such as gold and fixed income. Typically, stock returns are derived from price appreciation and dividends. Dividend payments have historically accounted for 40% of the average annual stock market return. A lesser known fact is that reinvested dividends have provided for 97% of historical stock market returns.

During tough market conditions such as the 2008 bear market, investors realize the positive of getting a return on your investment even if prices are collapsing across the board. Add in dividend increases, and several years down the road the income off the initial investment could be producing sizeable returns. Generalizations like this are usually ignored by investors however, as it doesn’t really provide a clear plan for action.

In order to respond to this I have included the best dividend stock for the long run. They come from many sectors and industries, and represent growing as well as maturing industries. The portfolio is not a recommendation to buy or sell any stocks, as it reflects my specific financial risk tolerance. Always do your own research before initiating a position in any financial instrument.

Typically dividend investors are being told to hold stocks in certain sectors such as energy trusts, utilities and financials. I do believe however that concentrating ones portfolio only on certain sectors does increase your risk. Chasing current dividends yields is seldom the best plan for action. Overweighting certain sectors might also be a recipe for a financial disaster. Maintaining a balanced approach that focuses on dividend growth and yield, as well as the traditional tools like diversification and dollar cost averaging, could be the best strategy for the long run. Furthermore being flexible could also aid to your portfolio. Chances are that new sectors of the economy will emerge over the next few decades. Adding reasonably priced dividend achievers is one way to be involved in those stocks.

The dividend stocks for the long run portfolio is underweight in technology and telecommunications services, and overweight the Consumer Staples and Consumer discretionary sectors. It only contains one foreign based stock, BP. The average yield is 3.45%, whle the average five year dividend growth rate is 15.90%. If the long term dividend growth rate stays at 6% on average for the whole portfolio, the expected yield on cost will be around 7% in 12 years and 14% in a little over 2 decades. You could also check it from this link.

I will be tracking the following portfolio versus the market using marketocracy virtual mutual funds.

I am using the rule of 72. If my growth rate is 6% per year forever, then my dividends would double in 12 years. Using a starting yield of 3.45%, in 12 years that comes out to 6.90-7%. In 12 more years at 6% growth, your yield on cost rises to 14%.

By yield on cost I mean the following:

You buy a stock for $100/share. In 2008 you get 3.50/share in dividends. Your current yield and yield on cost are 3.5%. In 2020 you receive $7/share. Your yield on cost is 7% on your cost of $100.

Bill,

I will be bullish on MSFT in 5 years, when they become a dividend achiever.

As for ABT it looks interesting, but the yield growth/balance does not seem as attractive as other non pharma stocks.

Nurse,

I own more than 35 dividend stocks. Some are on hold ( GE, MO) and have no further adding, while others I add to..

As a retiree with a similar strategy, I'd only add that I favor those payers who increase their dividends faster than inflation. Fortunately, in the current environment, mosst qualify. If we hit hyper-inflation in a year or two, things will get more interesting for this strategy.

BP is one of my favorite stocks. They pay a hefty dividend and have growth potential in the energy industry. Analysts never seem to mention BP. Exxon, ConocoPhillips and Chevron garner all the attention.

Txs for the list. Yes, helpful and informative. My only suggestion is to include a few more international picks such as DEO (UK), VOD (UK) and NSRGY (Nestle, Swiss). These are not only world market leaders, but great dividend growth stocks. When the dust settles, MFC (Can) may also turn out to be a world leader in insurance.

I would also recommend looking at some Dividend paying ETFs, like PFF, which invests in preferred stocks and is paying over 11% right now.

There is a also very conservative options strategy called a "collar strategy" where you hold a stock (or an index) and sell covered calls against it, and use the money from the calls to buy "insurance" using puts. I’ve been doing a lot of research into using this strategy. It looks like a very good conservative strategy. While you can "roll this yourself", it’s a lot of work. I have found 2 ways to have somebody else implement this for me. One is a service: http://www.swaninvesting.com/ and requires a large investment ($400K), and the other is a closed-end fund (traded on the NYSE): Eaton Vance Risk Managed Diversified (symbol: ETJ). Currently ETJ pays almost 10% dividends, which can be reinvested, but because it is a closed-end fund, it can trade either below, at, or above it’s Net Asset Value.--joe

OK...given your stated goals, what is your approach to pruning and trading up positions within a sector? For example how do you compare such growing utilities as CPL (Brazil), and HNP (China) against your current portfolio choices? The power consumption in growing, emerging markets is 2X the GDP and the yield is right up there with your choices and arguably exceeds it.

It's tough to evaluate international stocks which don't have a long history of raising their dividends. As I have stated above I do not chase yield. A 10% current yield is not appealing to me if it is not coupled with a long history of dividend increases and sustainability of the dividends. An increasing EPS over the past decade is important too

To make money in the stock market you have to balance dividend returns with capital gains. Focusing too much on the highest yielding stocks is just as dangerous as selling off 4% of your portfolio each year and relying on capital gains in retirement.

Back in 2002 when I saw the light about the power of dividends my first investing decision was to choose between BKH(one of your choices) and MDU. I picked the latter and have been accumulating shares through a DSP ever since. I believe the decision was the right one. Total return for 3&5 year favors MDU, dividend growth 3&5 year edge to MDU and 5year payout ratio for MDU is half that of BKH. Any comments?

I have about $82000.00 dollars in a traditional 401 K account were I am paying 0.29 for manage fees. This is not much and I have done relatively well over the last to 2 1/2 years were my portfolio was worth approximately $64000.00 dollars. But I am thinking can do better by myself minus the investment fees. I would like to pick a diversified 20 to 30 dividend stock portfolio and hold for the next 15 to 20 years. Any recommendations?

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